Google’s Nexus One: Niche device or disruptor?

More than two years ago, rumors began flying that search giant Google was working on its own branded phone. The company denied it at the time, and when they announced the Android mobile operating system, the business model involved other handset makers adopting an essentially open-source OS.

Since then, there have been relatively few Android-based phones released, the most promising being Verizon’s critically acclaimed Droid. But still, Android hasn’t caught the imagination of consumers in the same way as Apple’s iPhone, and it hasn’t drawn the mainstream business crowd like RIM’s Blackberry.

There are many reasons for that, but among them is the compromises handset designers must make to get their products sold by the various wireless carriers.

So what’s a monolithic search-software company to do? Maybe sell its own branded phone to show these hayseeds how it should be done . . . one that’s not tied to any specific carrier and gives the user the freedom to choose the best provider.

Google Inc. has designed a cellphone it plans to sell directly to consumers as soon as next year, according to people familiar with the matter.

The phone is called the Nexus One and is being manufactured for Google by HTC Corp., these people said. It runs Android, the operating system for mobile phones that Google developed, they added.

But unlike the more than half-dozen Android phones made by phone manufacturers today, Google designed virtually the entire software experience behind the phone, from the applications that run on it to the look and feel of each screen.

The Internet giant is taking a new, and potentially risky, approach to selling the device. Rather than selling the phone through a wireless carrier–the way the bulk of phones are sold in the U.S. today–Google plans to sell the Nexus One itself online. Users will have to buy cellular service for the device separately.

The WSJ story comes after Google apparently gave many of its employees trial units of the phone, and they began talking about them on Twitter. Inevitably, photos of the device also have been posted.

Gizmodo has a nice roundup of the Nexus One’s known specs, including that it has two microphones (one to filter background noise), a very large OLED touchscreen, no keyboard and a scroll ball. It’s apparently a GSM phone, which means it will work on T-Mobile’s and AT&T’s networks, and uses the fast Snapdragon processor.

Google, of course, has not confirmed anything. In a blog post, VP of Product Management Mario Queiroz said employees had been given a "mobile lab", which would allow them to test new wireless technologies. His post says nothing about Google actually selling this device to the public.

Last week TheStreet.com reported that Google had plans to sell a Google-developed phone at retail this year, bypassing carriers with its own Android implementation. But Rubin, vice president of engineering for Android at Google, scoffed at the notion that the company would "compete with its customers" by releasing its own phone.

"We’re not making hardware," Rubin said. "We’re enabling other people to build hardware."

Indeed, if I was the CEO of a telco that sold Android-based phones, I’d be more than a little livid right now. For example, Verizon is in the middle of a very expensive marketing push to sell the Droid, the most advanced Android-based smartphone so far. It’s being aimed at geeks and early adopters, the same crowd who’d happily keep their wallets closed until a Google-branded phone goes on sale next year.

If these reports are correct, Google’s move could be incredibly disruptive for the telecommunications industry – or not.

While other companies have sold unlocked phones – most notably Nokia – they’ve done so with limited success. Selling a phone not tied to a carrier means there are no service contract subsidies to keep the cost of the phone low. If Google wants to recoup its cash outlay on an advanced smartphone, it will probably have to charge at least $500, which is going to be too costly for many potential buyers. That might keep sales low, and keep the Nexus One in the niche-device category.

On the other hand, if it’s a hit even at a high price – or if Google itself chooses to subsidize the cost – it could be a "teaching moment" for the industry. Hardware that doesn’t compromise to keep a telco partner happy could utterly delight consumers and, indeed, show the hayseeds how it’s done.

The iPhone has done a lot to upend the wireless phone business. A hot-selling Google phone could do even more.

Update | 12.14.2009: Sascha Segan at PC World thinks the speculation about the Nexus One as a disruptive device is all wrong. He says Google’s been heavily involved in the design of previous Android phones, including the original T-Mobile G1 and the Motorola Droid. The scenario around this new phone is probably similar, he argues:

So as I said Saturday, what’s most likely here is that we have a new HTC Android phone which is the flagship for the newest version of Google’s Android software, much the way the T-Mobile G1 and Motorola Droid have been. It might also be the flagship phone for the new unsubsidized T-Mobile plans.

Segan also has an interesting view on Americans’ addiction to subsidized phones, and our yearning to be freed from the tyranny of our wireless providers. It’s a good read.